IMF WARNS BOSNIA ON SOARING PRICES AND INTEREST RATES

SARAJEVO, Bosnia (January 20,2008) - The International Monetary Fund (IMF) said that a surge in food prices and interest rates charged on loans in Bosnia may put pressure on stretched household budgets and slow consumer spending and investments.

"As food bills increase, households have less money to spend on other goods and services...which is especially true in Bosnia as consumption is a key economic driver," the IMF said in its Macroeconomic Newsletter.

It said that such a development could prevent Bosnians from servicing their debts and lead banks to ration new loans.

Prices of basic food staples in Bosnia have increased since last year due to a severe summer drought and surging prices of oil on the global market.

Some food items like butter and bread have increased by more than 80 and 40 percent respectively, while fuel and electricity prices are also expected to rise in coming weeks.

"To help mitigate inflation risks in the near term, public and private sector wage increases will need to be kept in line with productivity growth," the IMF said.

Bosnia's year-on-year inflation was 4.9 percent in December, while the foreign trade gap reached a record high of 8 billion Bosnian Marks (6 billion US Dollars).

The Bosnian GDP grew 7 percent due to a steady rise in industrial output and expansion in construction and services.

The IMF also warned that the current system of social benefits could not meet the needs of the most vulnerable social groups and urged the Bosnian authorities to design a well-targeted and funded benefit system.

Bosnia's trade unions have threatened to stage mass protests against soaring food prices and the government's failure to tackle the problem.

They also urged the government to cut the current 17 percent value added tax (VAT) to 12 percent and abolish the tax on food staples.

But the IMF said that strategies such as reducing the VAT or introducing exemptions are unlikely to provide targeted relief to the most needy, and would add further complexity to the tax system.

"The looming economic challenges underscore the importance of undertaking economic reform and adopting prudent fiscal policies," it added.

But the IMF also said that higher food prices could stimulate domestic agriculture production and import substitution, helping to ease the pressure in the long run.